Looking at pitfalls in retirement plan

A year ago, David and Betty Luck moved from Montana to Wisconsin to reconnect with family and friends, downshift into second careers, and prepare for eventual retirement.

David, 63, a longtime federal employee with the Department of Veterans Affairs who was transferred several times over his first career, now works full time as an administrative assistant for a health-care organization in Madison, Wis. Betty, 56, works part time as a teacher's aide for an elementary school close to the couple's home in Deerfield, Wis.

"We don't envision a lavish lifestyle in retirement," David said. "We're happy to just stroll down the streets of Madison, maybe catch a concert on the square now and then."

Two jobs, a government pension and a lifestyle set in a city routinely mentioned in magazines' lists of best places to live and retire ... what could go wrong with this picture?

For starters, David fears that Betty won't have enough money to live on if he dies young. They'll pull down an impressive $86,974 this year from jobs, investments, a pension and a trust fund, but their expenses are relatively high and a big percentage of their wealth is in David's name, said Ty Bernicke, a financial planner with Bernicke & Associates Ltd. in Eau Claire, Wis.

That's an important issue for a lot of couples where one spouse makes significantly more than the other.

At David's death, Betty will receive 60 percent of his $35,496 annual civil service pension. Under federal rules, she would not qualify for Social Security benefits. And David's inherited trust fund--with its roughly $15,000 in annual payouts--would go to the couple's two children: Daniel, 19, and Kally, 15.

The couple is contributing some money toward the kids' college costs--including an $18,681 college fund--but their bigger priority is making sure they cover their golden years, which many planners agree is the right move.

Insurance is an issue. David and Betty each have term life insurance policies that would pay $50,000. Bernicke thinks David should have triple that coverage.

"Their biggest challenge is to address the life insurance situation," Bernicke said.

The planner suggested checking two online insurance quote services, www.selectquote.com and www.intelliquote.com. The Lucks already have begun searching for a new policy, but some previous health concerns have them worried they won't find coverage, or that it will be prohibitively expensive.

"If that's the case, they can try to just start saving as much as possible to self-insure, but [Betty] may be looking at working much longer than she originally thought," Bernicke said. "If something happens to David in the next 10 years, Betty would suffer financially."

If they have at least a decade to save as much as possible, he said, the couple could stash away a tidy sum to prepare for when they are no longer working, and they would have more years of payouts from the trust fund under their belts.

Fortunately, Betty is in no hurry to retire altogether. She likes working with children at the elementary school. Ideally, she'd like to work more hours to help with the family bills.

"I love the job I have and have even volunteered in another district as an aide helping kids learn to read because I feel strongly about how important that is," she said.

As for living expenses, the couple needs to take control of what's going out the door as they settle into their new lifestyle, Bernicke said. With their projected expenses of $77,555 this year, they should be able to sock away almost $10,000 into savings.

"Even at that, they are spending a lot for this part of the country," Bernicke said. "If they reduced their spending, it would dramatically improve cash flow."

Gasoline and other car costs will chew up $7,379 this year, the couple estimates. They spend $4,330 a year on food and nearly $3,000 goes to charities. Another $13,000 goes toward uncategorized day-to-day living costs, they said, while taxes, clothing, household items, leisure, insurance, personal care and home maintenance add up to more than $34,000.

But Bernicke thinks their living costs will decline as the couple settles into their new home and more of a retirement lifestyle, though health-care spending could increase as they age. Already, they spend $7,081 a year on health care.

The Lucks also are paying too much in investment costs, Bernicke said.

They have a slew of mutual funds with front loads, or sales charges levied as investors buy into them, and relatively high expense ratios. Meanwhile, few of them have beaten their performance benchmarks, according to Morningstar Inc. data that Bernicke provided to the couple.

He suggested Betty consolidate her previous employer investments and individual retirement accounts into a single rollover IRA invested with a large, low-cost mutual fund supermarket. That account should be invested 68 percent in a fund that looks for large-capitalization, value-oriented stocks, Bernicke said. Another 16 percent should be placed in a fund that buys large-cap growth stocks, and the rest should go in a high-yield corporate bond fund.

Sound too risky for someone in her 50s? Bernicke also recommends establishing an emergency fund of $40,000 invested in a high-yield savings account, made up of Betty's current bond savings and certificates of deposit.

He also rounds out the couple's asset allocation in David's retirement accounts. He recommends transferring those accounts to the same low-cost fund provider and investing 22 percent in a large-growth index fund, 24 percent in small-cap value, 16 percent in small-cap growth, 16 percent international value, 10 percent in high-yield corporates and 12 percent in an intermediate-term bond fund.

He also recommends moving the Lucks' car savings account--now about $5,400 invested in more high-cost bond funds--to a certificate of deposit set to mature about the same time they will need to buy a new car. The reason: CD rates have been rising, and they pay a stable return, while bond funds can fluctuate in price and be down just when they need the car, Bernicke said.

"That's an excellent suggestion," David Luck said, adding that he's planning to implement the other changes Bernicke suggested. "I've often wondered where the growth is that we talked about" with their last investment firm.